Question 1

Arbitrage is based on the idea that _________.

Accepted Answer

A)  assets with identical risks must have the same expected rate of return 
B)  securities with similar risk should sell at different prices 
C)  the expected returns from equally risky assets are different 
D)  markets are perfectly efficient 
A)  assets with identical risks must have the same expected rate of return 
B)  securities with similar risk should sell at different prices 
C)  the expected returns from equally risky assets are different 
D)  markets are perfectly efficient

Question 2

Consider the single factor APT.Portfolio A has a beta of 1.3 and an expected return of 21%.Portfolio B has a beta of 0.7 and an expected return of 17%.The risk-free rate of return is 8%.If you wanted to take advantage of an arbitrage opportunity,you should take a short position in portfolio __________ and a long position in portfolio _________.

Accepted Answer

A)  A, A 
B)  A, B 
C)  B, A 
D)  B, B 
A)  A, A 
B)  A, B 
C)  B, A 
D)  B, B

Question 3

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.

Accepted Answer

A)  1.14 
B)  1.20 
C)  1.26 
D)  1.50 
A)  1.14 
B)  1.20 
C)  1.26 
D)  1.50

Question 4

You run a regression of a stock's returns versus a market index and find the following:   Based on the data you know that the stock

Accepted Answer

A)  earned a positive alpha that is statistically significantly different from zero 
B)  has a beta precisely equal to 0.890 
C)  has a beta that could be anything between 0.6541 and 1.465 inclusive 
D)  has no systematic risk 
A)  earned a positive alpha that is statistically significantly different from zero 
B)  has a beta precisely equal to 0.890 
C)  has a beta that could be anything between 0.6541 and 1.465 inclusive 
D)  has no systematic risk

Question 5

If all investors become more risk averse the SML will _______________ and stock prices will _______________.

Accepted Answer

A)  shift upward; rise 
B)  shift downward; fall 
C)  have the same intercept with a steeper slope; fall 
D)  have the same intercept with a flatter slope; rise 
A)  shift upward; rise 
B)  shift downward; fall 
C)  have the same intercept with a steeper slope; fall 
D)  have the same intercept with a flatter slope; rise

Question 6

The most significant conceptual difference between the arbitrage pricing theory (APT)and the capital asset pricing model (CAPM)is that the CAPM _____________.

Accepted Answer

A)  places less emphasis on market risk 
B)  recognizes multiple unsystematic risk factors 
C)  recognizes only one systematic risk factor 
D)  recognizes multiple systematic risk factors 
A)  places less emphasis on market risk 
B)  recognizes multiple unsystematic risk factors 
C)  recognizes only one systematic risk factor 
D)  recognizes multiple systematic risk factors

Question 7

The beta of a security is equal to _________.

Accepted Answer

A)  the covariance between the security and market returns divided by the variance of the market's returns 
B)  the covariance between the security and market returns divided by the standard deviation of the market's returns 
C)  the variance of the security's returns divided by the covariance between the security and market returns 
D)  the variance of the security's returns divided by the variance of the market's returns 
A)  the covariance between the security and market returns divided by the variance of the market's returns 
B)  the covariance between the security and market returns divided by the standard deviation of the market's returns 
C)  the variance of the security's returns divided by the covariance between the security and market returns 
D)  the variance of the security's returns divided by the variance of the market's returns

Question 8

According to the CAPM which of the following is not a true statement regarding the market portfolio.

Accepted Answer

A)  All securities in the market portfolio are held in proportion to their market values 
B)  It includes all risky assets in the world, including human capital 
C)  It is always the minimum variance portfolio on the efficient frontier 
D)  It lies on the efficient frontier 
A)  All securities in the market portfolio are held in proportion to their market values 
B)  It includes all risky assets in the world, including human capital 
C)  It is always the minimum variance portfolio on the efficient frontier 
D)  It lies on the efficient frontier

Question 9

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio X has an expected return of 14% and a beta of 1.00.Portfolio Y has an expected return of 9.5% and a beta of 0.25.In this situation,you would conclude that portfolios X and Y _________.

Accepted Answer

A)  are in equilibrium 
B)  offer an arbitrage opportunity 
C)  are both underpriced 
D)  are both fairly priced 
A)  are in equilibrium 
B)  offer an arbitrage opportunity 
C)  are both underpriced 
D)  are both fairly priced

Question 10

In a simple CAPM world which of the following statements is/are correct?
I.All investors will choose to hold the market portfolio,which includes all risky assets in the world
II.Investors' complete portfolio will vary depending on their risk aversion
III.The return per unit of risk will be identical for all individual assets
IV.The market portfolio will be on the efficient frontier and it will be the optimal risky portfolio

Accepted Answer

A)  I, II and III only 
B)  II, III and IV only 
C)  I, III and IV only 
D)  I, II, III and IV 
A)  I, II and III only 
B)  II, III and IV only 
C)  I, III and IV only 
D)  I, II, III and IV

Question 11

The risk premium for exposure to exchange rates is 5% and the firm has a beta relative to exchanges rates of 0.4.The risk premium for exposure to the consumer price index is -6% and the firm has a beta relative to the CPI of 0.8.If the risk free rate is 3.0%,what is the expected return on this stock?

Accepted Answer

A)  0.2% 
B)  1.5% 
C)  3.6% 
D)  4.0% 
A)  0.2% 
B)  1.5% 
C)  3.6% 
D)  4.0%

Question 12

The expected return on the market portfolio is 15%.The risk-free rate is 8%.The expected return on SDA Corp.common stock is 16%.The beta of SDA Corp.common stock is 1.25.Within the context of the capital asset pricing model,_________.

Accepted Answer

A)  SDA Corp. stock is underpriced 
B)  SDA Corp. stock is fairly priced 
C)  SDA Corp. stock's alpha is -0.75% 
D)  SDA Corp. stock alpha is 0.75% 
A)  SDA Corp. stock is underpriced 
B)  SDA Corp. stock is fairly priced 
C)  SDA Corp. stock's alpha is -0.75% 
D)  SDA Corp. stock alpha is 0.75%

Question 13

One of the main problems with the arbitrage pricing theory is __________.

Accepted Answer

A)  its use of several factors instead of a single market index to explain the risk-return relationship 
B)  the introduction of non-systematic risk as a key factor in the risk-return relationship 
C)  that the APT requires an even larger number of unrealistic assumptions than the CAPM 
D)  the model fails to identify the key macroeconomic variables in the risk-return relationship 
A)  its use of several factors instead of a single market index to explain the risk-return relationship 
B)  the introduction of non-systematic risk as a key factor in the risk-return relationship 
C)  that the APT requires an even larger number of unrealistic assumptions than the CAPM 
D)  the model fails to identify the key macroeconomic variables in the risk-return relationship

Question 14

Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?

Accepted Answer

A)  6% 
B)  15.6% 
C)  18% 
D)  21.6% 
A)  6% 
B)  15.6% 
C)  18% 
D)  21.6%

Question 15

The arbitrage pricing theory was developed by _________.

Accepted Answer

A)  Henry Markowitz 
B)  Stephen Ross 
C)  William Sharpe 
D)  Eugene Fama 
A)  Henry Markowitz 
B)  Stephen Ross 
C)  William Sharpe 
D)  Eugene Fama

Question 16

Standard deviation of portfolio returns is a measure of ___________.

Accepted Answer

A)  total risk 
B)  relative systematic risk 
C)  relative non-systematic risk 
D)  relative business risk 
A)  total risk 
B)  relative systematic risk 
C)  relative non-systematic risk 
D)  relative business risk

Question 17

Consider the CAPM.The risk-free rate is 5% and the expected return on the market is 15%.What is the beta on a stock with an expected return of 17%?

Accepted Answer

A)  .5 
B)  .7 
C)  1 
D)  1.2 
A)  .5 
B)  .7 
C)  1 
D)  1.2

Question 18

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect stock X with a beta of .8 to offer a rate of return of 12 percent,then you should _________.

Accepted Answer

A)  buy stock X because it is overpriced 
B)  buy stock X because it is underpriced 
C)  sell short stock X because it is overpriced 
D)  sell short stock X because it is underpriced 
A)  buy stock X because it is overpriced 
B)  buy stock X because it is underpriced 
C)  sell short stock X because it is overpriced 
D)  sell short stock X because it is underpriced

Question 19

The possibility of arbitrage arises when ____________.

Accepted Answer

A)  there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily 
B)  mis-pricing among securities creates opportunities for riskless profits 
C)  two identically risky securities carry the same expected returns 
D)  investors do not diversify 
A)  there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily 
B)  mis-pricing among securities creates opportunities for riskless profits 
C)  two identically risky securities carry the same expected returns 
D)  investors do not diversify

Question 20

According to the capital asset pricing model,a security with a _________.

Accepted Answer

A)  negative alpha is considered a good buy 
B)  positive alpha is considered overpriced 
C)  positive alpha is considered underpriced 
D)  zero alpha is considered a good buy 
A)  negative alpha is considered a good buy 
B)  positive alpha is considered overpriced 
C)  positive alpha is considered underpriced 
D)  zero alpha is considered a good buy

Arbitrage is based on the idea that _________.

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.

You run a regression of a stock's returns versus a market index and find the following: Based on the data you know that the stock

If all investors become more risk averse the SML will _ and stock prices will _.

The most significant conceptual difference between the arbitrage pricing theory (APT)and the capital asset pricing model (CAPM)is that the CAPM _____________.

The beta of a security is equal to _________.

According to the CAPM which of the following is not a true statement regarding the market portfolio.

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio X has an expected return of 14% and a beta of 1.00.Portfolio Y has an expected return of 9.5% and a beta of 0.25.In this situation,you would conclude that portfolios X and Y _________.

The expected return on the market portfolio is 15%.The risk-free rate is 8%.The expected return on SDA Corp.common stock is 16%.The beta of SDA Corp.common stock is 1.25.Within the context of the capital asset pricing model,_________.

One of the main problems with the arbitrage pricing theory is __________.

Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?

The arbitrage pricing theory was developed by _________.

Standard deviation of portfolio returns is a measure of ___________.

Consider the CAPM.The risk-free rate is 5% and the expected return on the market is 15%.What is the beta on a stock with an expected return of 17%?

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect stock X with a beta of .8 to offer a rate of return of 12 percent,then you should _________.

The possibility of arbitrage arises when ____________.

According to the capital asset pricing model,a security with a _________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

Exam 7: Capital Asset Pricing and Arbitrage Pricing Theory

Arbitrage is based on the idea that _________.

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90.The beta of this portfolio is _________.

You run a regression of a stock's returns versus a market index and find the following: Based on the data you know that the stock

If all investors become more risk averse the SML will _______________ and stock prices will _______________.

The most significant conceptual difference between the arbitrage pricing theory (APT)and the capital asset pricing model (CAPM)is that the CAPM _____________.

The beta of a security is equal to _________.

According to the CAPM which of the following is not a true statement regarding the market portfolio.

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%.Portfolio X has an expected return of 14% and a beta of 1.00.Portfolio Y has an expected return of 9.5% and a beta of 0.25.In this situation,you would conclude that portfolios X and Y _________.

The expected return on the market portfolio is 15%.The risk-free rate is 8%.The expected return on SDA Corp.common stock is 16%.The beta of SDA Corp.common stock is 1.25.Within the context of the capital asset pricing model,_________.

One of the main problems with the arbitrage pricing theory is __________.

Consider the CAPM.The risk-free rate is 6% and the expected return on the market is 18%.What is the expected return on a stock with a beta of 1.3?

The arbitrage pricing theory was developed by _________.

Standard deviation of portfolio returns is a measure of ___________.

Consider the CAPM.The risk-free rate is 5% and the expected return on the market is 15%.What is the beta on a stock with an expected return of 17%?

The risk-free rate is 4%.The expected market rate of return is 11%.If you expect stock X with a beta of .8 to offer a rate of return of 12 percent,then you should _________.

The possibility of arbitrage arises when ____________.

According to the capital asset pricing model,a security with a _________.

Investments: Background and Issues

Asset Classes and Financial Instruments

Securities Markets

Mutual Funds and Other Investment Companies

Risk and Return: Past and Prologue

Efficient Diversification

The Efficient Market Hypothesis

Behavioral Finance and Technical Analysis

Bond Prices and Yields

Managing Bond Portfolios

Macroeconomic and Industry Analysis

Equity Valuation

Financial Statement Analysis

Options Markets

Option Valuation

Futures Markets and Risk Management

Portfolio Performance Evaluation

Globalization and International Investing

Hedge Funds

Taxes,inflation,and Investment Strategy

Investors and the Investment Process

Filters

If all investors become more risk averse the SML will _ and stock prices will _.